Social Security provides inflation-protected retirement income for tens of millions of Americans. And while the general idea behind the program is fairly easy to understand -- you get a monthly payment based on your work history -- there are a lot of rules and formulas to know.
Some of the most important, and lesser known, Social Security rules have to do with married couples and their retirement income. With that in mind, whether you're a young, working married couple or you're married and getting closer to retirement, here are three important rules and concepts about Social Security spousal benefits you need to know.
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Spousal benefits can provide valuable retirement income
Here's perhaps the most important principle to know about Social Security spousal benefits. A spousal benefit can provide the lower-earning spouse with as much as half of the higher-earning spouse's full retirement benefit.
In other words, let's say you're entitled to a $2,500 monthly Social Security benefit at full retirement age based on your work record, but your spouse was a stay-at-home parent and didn't have an income for most of his or her adult life. In this case, the your spouse could collect as much as $1,250 per month, in addition to your benefit, based on his or her own work record.
As of the latest data, there are about 1.9 million spouses of retired workers who collect a Social Security spousal benefit, with an average monthly payment of $931. That means a spousal benefit provides nearly $11,200 per year in additional inflation-protected retirement income for married couples who qualify.
Couples can't just claim a spousal benefit
Years ago, there used to be a popular Social Security strategy known as file-and-suspend. Essentially, the primary earner would file for Social Security benefits, and the spouse would file as well. But the primary earner would immediately suspend his or her benefits, allowing the spouse to collect a spousal benefit while accumulating delayed retirement credit.
This is no longer allowed, as the loophole that made this possible was closed several years ago. Now, to collect a Social Security spousal benefit, the higher-earning spouse must be actively receiving benefits, regardless of whether either spouse has reached full retirement age.
There's no benefit for delayed spousal benefits
Just as with Social Security benefits for retired workers, you can claim a spousal benefit as early as age 62, as long as the higher-earning spouse has also claimed benefits. And just as with retired worker benefits, spousal benefits are reduced if the beneficiary has not yet reached full retirement age, which is between 66 and 67 years old, depending on what year you were born.
The short version is that someone who has a full retirement age of 67 and starts collecting a spousal benefit at 62 will have his or her benefit reduced by 35%, compared with what that person would be entitled to at full retirement age.
However, one little-known rule is that unlike retired worker benefits, there is no increase for delaying a spousal benefit. With retired worker benefits, the monthly payment increases by 8% for every year beyond full retirement age, up to age 70. But there's no increase for delaying a spousal benefit. In other words, if you would receive a $1,000 monthly spousal benefit at age 67, you'd also get a $1,000 monthly benefit if you decided to wait until 68 or 69.
This can be an important factor to consider when planning the best course of action for your Social Security. While this isn't true for everyone, the takeaway is that if your spouse expects to get a benefit based on your work record, it rarely makes good financial sense to delay claiming your Social Security benefit beyond your spouse's full retirement age.
